"Is the Chinese growth miracle built to last?"

Eswar Prasad writes on whether the Chinese growth miracle is built to last. I suspect not. What is interesting is the timing of this article.

Note that the paper was received by China Economic Review in December 2007. That is over 13 months ago and the economic landscape is now very different.

I think this paper misses a large part of the story but nonetheless it contains a large number of up to date facts and figures which are useful to the layman.

The recent collapse in exports and the loss of jobs in China is not a result of structural problems in China but more related to the global fall in demand. This issue is not given sufficient attention.

Is the Chinese growth miracle built to last?

Eswar S. PRASAD

Tolani Senior Professor of Trade Policy, Cornell University, United States

Received 13 December 2007;
revised 26 May 2008;
accepted 28 May 2008.
Available online 10 June 2008.

Abstract

Is the Chinese growth miracle – a remarkably high growth rate sustained for over two decades – likely to persist or are the seeds of its eventual demise contained in the policies that have boosted growth? For all its presumed flaws, the particular approach to macroeconomic and structural policies that has been adopted by the Chinese government has helped to deliver high productivity and output growth, along with a reasonable degree of macroeconomic stability. There comes a point, however, when the policy distortions needed to maintain this approach could generate imbalances, impose potentially large welfare costs, and themselves become a source of instability.

The traditional risks faced by emerging market economies, especially those related to having an open capital account, do not loom large in the case of China. In the process of securing protection against external risks, however, Chinese policymakers may have increased the risks of internal instability. There are a number of factors that could trigger unfavorable economic dynamics that, even if they don't rise to the level of a crisis, could have serious adverse repercussions on growth and welfare. The flexibility and potency of macroeconomic tools to deal with such negative shocks is constrained by the panoply of policies that has supported growth so far.

Keywords: Exchange rate flexibility; Capital account liberalization; Growth model; Macroeconomic policies; Financial sector reforms

JEL classification codes: E2; E5; E6; F3; O1#


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